There are a variety of requirements that need to be met depending on the type of refinance option you choose. For cash-out refinance options, your name must be on the title of your home for a minimum of 6 months if you have a jumbo loan or VA loan. You’ll likely need to wait a year for a conventional or FHA cash-out refinance. There are limited exceptions to these rules including if you’re taking advantage of delayed financing or you’ve inherited the home.
There are also a few other refinance requirements you will need to consider before applying to your mortgage lender.
An Adequate Credit Score
Your credit score has a direct impact on your ability to refinance. Your credit score is a number that ranges from 300 to 850 and is used to indicate your creditworthiness.
Lenders look at your score to determine how likely you are to repay your debts. Your current credit score also determines whether you’re eligible for a refinance and the mortgage rate you can get.
Just like with your original mortgage, the higher your credit score, the better your rate. Most lenders require a credit score of 620 to refinance to a conventional loan.
FHA Loan Refinance Credit Score Requirements
FHA loans have a 500 minimum median qualifying credit score. However, most FHA-approved lenders set their own credit limits. Rocket Mortgage® requires a minimum 580 credit score to qualify. The credit score to qualify for a cash-out FHA loan refinance is often slightly higher at 620. The exception is if you already have your loan with us and you're taking cash out to pay off debt at closing. The median credit score can be as low as 580.
You can also refinance through an FHA Streamline refinance, which enables you to refinance an existing FHA loan to a lower interest rate more quickly. You can avoid a lot of extra paperwork and continue with a no-appraisal refinance in many cases. Since you’ve already proven you are a good credit risk for an FHA-guaranteed loan through your original FHA mortgage, the streamline option can save you time and money.
If you're looking to lower your rate or change your term, the minimum median qualifying credit score to get a VA loan is 580. You can also take cash out at this score as long as you leave at least 10% equity in your home after the refinance. If your median score is 620 or higher, you can cash out up to the full amount of your equity.
The Department of Veterans Affairs loan program offers a refinance streamline program called an Interest Rate Reduction Refinance Loan (IRRRL). Rocket Mortgage requires a minimum 580 credit score to proceed with a VA IRRRL. If you want a VA IRRRL with Rocket Mortgage but are switching from a different lender, you'll need a minimum credit score of 600.
If you're worried about qualifying for a refinance with your current credit, there are strategies for refinancing with bad credit.
Substantial Home Equity
In addition to an adequate credit score, you must have built up enough equity in your home to qualify for a refinance. Home equity is the percentage of the home’s value that you own and is the amount you would get if you sold the house and paid off your mortgage. The more equity you have, the better.
20% Equity Or More
A general rule of thumb is that you should have at least 20% equity in your home if you want to refinance. If you want to get rid of private mortgage insurance, you’ll likely need 20% equity in your home. This number is often the amount of equity you’ll need if you want to do a cash-out refinance, too.
It’s important to also note that most mortgage lenders only allow borrowers to use 80% – 90% of their home’s equity for a cash payment. Although, if you are refinancing with a VA loan, your lender may allow a higher loan-to-value ratio (LTV), depending on your credit score and personal situation. At Rocket Mortgage, you can cash out up to 100% of your equity with a minimum 620 FICO® Score.
Under 20% Equity
If your equity is under 20% and if you have a good credit rating, you may still be able to refinance, but you might have to settle for a higher interest rate or mortgage insurance. You may find that it’s worth refinancing even if you don’t have much equity if interest rates have dropped significantly since you closed on your mortgage.
There are no equity requirements for interest-reduction FHA Streamline refinance loans. You do need 20% equity for a cash-out refi in most circ*mstances.
Depending on your loan type and lender, you'll likely need to meet the following refinance requirements: a current mortgage loan in good standing, enough home equity, a qualifying credit score, a moderate debt-to-income ratio, and enough cash to cover the costs of refinancing.
In addition to an adequate credit score, you must have built up enough equity in your home to qualify for a refinance. Home equity is the percentage of the home's value that you own and is the amount you would get if you sold the house and paid off your mortgage. The more equity you have, the better.
You may find yourself underwater on your mortgage, meaning you owe more than the property is worth. In this case, it can be difficult to be approved for a refinance loan. You may also be denied if your home is in poor condition, or if you made improvements that weren't permitted by local housing authorities.
It's a good rule to refinance if you can reduce your interest rate by at least 1%. Mortgage rates naturally rise and fall. But, when the economy struggles, mortgage rates usually fall. Just because interest rates are low, though, doesn't mean it's the best choice for you to refinance.
They'll review your income, assets, debt and credit score to determine whether you meet the requirements to refinance and can pay back the loan. Some documents your lender might need include the following: Two most recent pay stubs. Two most recent W-2s.
For instance, to meet the 20% equity threshold, you can multiply your home value by 0.8 (80%). Home value x 0.8 = maximum loan amount: For a $300,000 property, your total loan balance can be no more than $240,000. Otherwise, you'll be stuck paying mortgage insurance until you reach 80% LTV.
However, if your equity is less than 20 percent, and if you have a good credit rating, you may be able to refinance anyway. In this case, the lender may charge you a higher interest rate or make you take out mortgage insurance.
You don't need a down payment to refinance, but you'll likely have to come up with cash for closing costs. Some lenders let you roll closing costs into the mortgage to avoid upfront expenses. You can also try negotiating with the lender to waive them.
Lenders often want applicants to have at least 20 percent equity before they consider refinancing a loan. Home equity is the cash value of your home. For example, if your home is valued at $400,000 and you owe $200,000 on the mortgage, your home has $200,000 of net equity.
Refinancing can be a rigorous process that requires a home appraisal, documentation of your income and assets, a review of your credit history and your debt-to-income ratio. Falling short of a lender's requirements in just one of these areas could cause your refinance application to be rejected.
Not all homeowners are approved for refinancing, though. With home prices and interest rates still high, lenders are careful about who they approve. The rejection rate on mortgage refinance applications increased to 15.5% in 2023 from 9.9% in 2022, according to the Federal Reserve Bank of New York.
At the same time, refinancing can be a little complicated, especially if your credit score is less than ideal or you're not completely sure what to expect. When you refinance, it means you're essentially taking out a brand new loan on your property, often for the remainder that you owe (but not always).
The main benefits of refinancing your home are saving money on interest and having the opportunity to change loan terms. Drawbacks include the closing costs you'll pay and the potential for limited savings if you take out a larger loan or choose a longer term.
The bottom line. You don't have to lose any equity when you refinance, but there's a chance that it could happen. For example, if you take cash out of your home when you refinance your mortgage or use your equity to pay closing costs, your total home equity will decline by the amount of money you borrow.
During the mortgage loan application process, lenders will usually want to see 2 to 3 months' worth of checking and savings account statements. They will review these statements to confirm your income and expense history and ensure you'll be able to make your mortgage payments.
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